CIBC stock expected to take hit as Aeroplan switches to TD Bank

Aimia Inc.'s decision to sign with Toronto-Dominion Bank as its credit card partner for the Aeroplan customer loyalty program may not be a surprise to some, but it is nonetheless expected to weigh on CIBC shares

Aimia Inc.’s decision to sign with Toronto-Dominion Bank as its credit card partner for the Aeroplan customer loyalty program may not be a surprise to some, but it is nonetheless expected to weigh on CIBC shares.

Aeroplan’s agreement with CIBC expires Aug. 9, 2013, and while the bank has the right of first refusal to match the terms of TD’s deal, it doesn’t look likely it will.

Barclays analyst John Aiken attributes this to the fact that relations between Aimia and CIBC have likely become tarnished as a result of recent developments.

He thinks the news will weight on CIBC’s valuation as this was not necessarily completely priced into the stock.

The analyst suggested the bank will likely encounter lower-than-peer growth in card lending as some customers move platforms and CIBC focuses on retaining its most profitable customers.

He also pointed out the anticipated gradual reduction in cardholders will result in lower revenues as balances, fees and transactions.

“Finally, as CIBC has indicated, it will incur additional costs to develop its replacement platform as well as marketing spending in order to facilitate client retention,” Mr. Aiken said, noting the impact on earnings will be less than 10% of his 2014 EPS of $8.91 in a worst-case scenario.

TD said the agreement will likely not have a material impact on 2014 earnings, but the bank remains positive on the outlook for 2015.

“We believe that signing the agreement fits in quite well with TD’s strategy to focus on assets and should complement the growth from the MBNA card acquisition,” the analyst said. “While there will be incremental spending associated with marketing and guaranteeing minimum purchases from Aimia, we do not believe that they will be overly disruptive to earnings and that the transaction further bolsters TD’s relative domestic growth profile.”

“While CIBC has provided little information regarding the potential impact of this agreement on its domestic banking business, and has not confirmed whether it intends to exercise its right of first refusal…, the loss of the Aeroplan arrangement would in our view come at a very unfortunate juncture for CIBC,” he said in a research note.

Mr. Aiken warned this would further challenge CIBC’s ability to maintain existing market share, while the bank attempts to build an alternative premium travel rewards credit card offering from scratch.